Howard Marks New Memo DARE TO BE GREAT PART II

In September 2006, I wrote a memo entitled Dare to Be Great, with suggestions on how institutional investors might approach the goal of achieving superior investment results. I’ve had some additional thoughts on the matter since then, meaning it’s time to return to it. Since fewer people were reading my memos in those days, I’m going to start off repeating a bit of its content

…………………………..

Dare to Be Different

Here’s a line from Dare to Be Great: “This just in: you can’t take the same actions aseveryone else and expect to outperform.” Simple, but still appropriate.

For years I’ve posed the following riddle: Suppose I hire you as a portfolio manager and we agree you will get no compensation next year if your return is in the bottom nine deciles of the investor universe but $10 million if you’re in the top decile. What’s the first thing you have todo – the absolute prerequisite – in order to have a chance at the big money? No one hasever answered it right.

The answer may not be obvious, but it’s imperative: you have to assemble a portfolio that’s

different from those held by most other investors. If your portfolio looks likeeveryone else’s, you may do well, or you may do poorly, but youcan’t do different. being different is absolutely essential if you want a chance at being superior. In order to L get into the top of the performance distribution, you have to escape from the crowd. There are many ways to try. They include being active in unusual market niches; buying things others haven’t found, don’t like or consider too risky to touch; avoiding market darlings that the crowd thinks can’t lose; engagin in contrarian cycle timing; and concentrating heavily in a small number . of things you think will deliver exceptional performance.

…………………….

…………………………

In the course of the presentation described at the beginning of this memo, I pointed out to the sovereign wealth fund’s managers that they had allocated close to a billion dollars to Oaktree’s management over the preceding 15 years. Although that sounds like a lot of money, it actually amounts to only a few tenths of a percent of what the world guesses their assets to be. And given our funds’ cycle of investing and divesting, that means they didn’t have even a few tenths of a percent of their capital with us at any one time. Thus, despite our good performance, I think it’s safe to say Oaktree couldn’t have had a meaningful impact on the fund’s overall results. Certainly one would associate this behavior with an extreme lack of risk tolerance and a high aversion to headline risk. I urged them to consider whether this reflects their real preference Lou Brock of the St. Louis Cardinals was one of baseball’s best base stealers between 1966 and 1974. He’s the source of a great quote: “Show me a guy who’s afraid to look bad, and I’ll. show you a guy you can beat every time.” What he meant (with apologiesPto readers who. don’t understand baseball) is that in order to prevent a great runner fromL stealing a base, a pitcher may have to throw over to the bag ten times in a row to hold him close, rather than pitch to the batter. But after a few such throws, a pitcher can look like a scaredy-cat and be booed